The Middle East faces economic chaos

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The Middle East faces economic chaos

The Economist | January 18, 2024

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Just over 100 days after Hamas’s attack on Israel started a war in Gaza, the conflict is still escalating. A full-blown regional war has so far been avoided, largely because neither Iran nor America wants one. Yet the conflict’s economic consequences are already vast. Trade routes are blocked, disrupting global shipping and devastating local economies. The Middle East’s most productive industries are being battered. And in Lebanon and the West Bank, growing hardship threatens to spark even more violence.

Start with trade. Before Hamas’s attack, a fifth of the average Middle Eastern country’s total exports—from Israeli tech to oil from the Gulf—were sent somewhere else in the region. Geopolitical enemies were increasingly trading with each other. Now, the routes that transported more than half of all goods are blocked. Intra-regional trade has collapsed. At the same time, the cost of shipping goods out of the Middle East has risen. That will send many exporters, operating on razor-thin margins, out of business in the months to come.  The Red Sea used to handle 10% of all goods moving around the world. But since the Houthis began launching missiles, its shipping volumes have dropped to just 30% of normal levels.  For some of the countries bordering the Red Sea, Houthi missile strikes have far worse consequences.  Further disruption could visit financial ruin on Egypt, one of the region’s biggest countries.

Conflict has also hit the Middle East’s most promising industries. Before October 7th Israel’s tech sector was its brightest bright spot, contributing a fifth of the country’s gdp. Now it is struggling. Investors are pulling funding, customers are cancelling orders and much of its workforce has been called up to fight.  Jordan, meanwhile, is suffering from forgone tourism, which would normally constitute 15% of its gdp. Its struggles are emblematic of those across the region: even Gulf states have seen tourist numbers dip. Yet the most dangerous economic consequence of the war may be the hardship inflicted on populations in Lebanon and the West Bank, two powder kegs that could easily explode into more violence.  Things are no better in the West Bank. Of its 3.1m residents, 200,000 are factory workers who used to commute to Israel every day. They are out of work after Israel revoked their permits. Meanwhile, 160,000 civil servants have not been paid since the war began.

The Middle East has long been full of economies on the brink. Israel’s war with Hamas may now tip them over. To make ends meet, their governments have built houses of cards, balancing bail-outs from Gulf states, handouts from America and expensive short-term loans. The risk of it all tumbling down is worryingly high.  The rest of the world economy has so far faced few costs from the conflict. Oil prices have remained relatively calm, except for a spike in early January, and the effects on global growth and inflation are likely to be minimal. But if much of the Middle East slides into a debt crisis, all that could change, and fast.

3 key takeaways from the article

1. Just over 100 days after Hamas’s attack on Israel started a war in Gaza, the conflict is still escalating. A full-blown regional war has so far been avoided, largely because neither Iran nor America wants one. Yet the conflict’s economic consequences are already vast. Trade routes are blocked, disrupting global shipping and devastating local economies. The Middle East’s most productive industries are being battered. And in Lebanon and the West Bank, growing hardship threatens to spark even more violence.
2. The Middle East has long been full of economies on the brink. Israel’s war with Hamas may now tip them over.  To make ends meet, Middle Eastern governments have built houses of cards, balancing bail-outs from Gulf states, handouts from America and expensive short-term loans. The risk of it all tumbling down is worryingly high.  
3. The rest of the world economy has so far faced few costs from the conflict. But if much of the Middle East slides into a debt crisis, all that could change, and fast.

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Topics:  War, Middle East, Economic Development, Global Economy